Despite his admiration for setting challenging goals, Jack Welch also referred to the budgeting process as "the most inefficient process in management" and as Identify the problem and uncertainties. The challenge is to identify a strategy and budget to achieve 10% profit growth. These schedules make up the projected income statement—the key summary in the operating budget—shown in dark purple.
The cash budget and the budgeted income statement can then be used to prepare two other summary financial statements—the budgeted balance sheet and the budgeted statement of cash flows—shown in dark blue.
Prepare the Direct Material Usage Budget and Direct Material Purchases Budget
For 300,000 direct manufacturing labor hours, Stylistic's production managers estimate various overhead line items that represent the overhead costs of manufacturing operations (that is, all costs for which direct manufacturing labor hours are a cost driver). Manufacturing operations overhead is allocated to finished goods inventory at a budgeted rate of $30 per direct manufacturing labor hour (total budgeted manufacturing operations overhead, direct manufacturing labor hours).
A 3% decrease in the selling price of the Casual table and a 3% decrease in the selling price of the Deluxe table
Second, direct materials supply shortages could result in a 5% increase in direct materials prices (reddough and granite) above the material prices projected in the 2012 budget. He asks Tina Larsen, management accountant, to use Stylistics' financial planning model to evaluate how these results will affect budgeted operating income. Financial planning models are mathematical representations of the relationship between operating activities, financing activities, and other factors that affect the master budget.
Companies can use computer-based systems, such as Enterprise Resource Planning (ERP) systems, to perform calculations for these planning models. ERP systems store large amounts of information about the materials, machines and equipment, labor, power, maintenance and setups required to manufacture different products. Once sales volumes for different products are identified, the software can quickly calculate the budgeted costs for manufacturing these products.
Software packages typically have a module on sensitivity analysis to assist managers in their planning and budgeting. Sensitivity analysis is a "what if" technique that examines how an outcome will change if the original predicted data are not obtained or if an underlying assumption is changed. To see how the sensitivity analysis works, we consider two scenarios identified as possibly affecting Stylistic Furniture's 2012 budget model.
A 5% increase in the price per board foot of red oak and a 5% increase in the price per square foot of granite
Companies that use ERP systems and other similar budgeting tools find that these systems simplify budgeting and reduce the computational burden and time required to prepare budgets.
Learning Objective 4
Security in the system is strict: Access is limited only to accounts for which the administrator is authorized. Scott Lampe, chief financial officer, said: “Forecaster allows us to change our forecasts to respond to changes, whether it's rule changes [such as changes to the series scoring system]. It also allows Hendrick to complete his annual budget process in just six weeks, a 50 percent reduction in the time spent on budgeting and planning, critical given NASCAR's extremely short offseason.
Coordinating the company's efforts means assigning responsibility to managers who are responsible for their actions in planning and controlling human and other resources. A responsibility center is a unit, segment, or subunit of an organization whose manager is responsible for a specified set of activities. The maintenance department of a Marriott hotel is a cost center because the maintenance manager is solely responsible for costs. This budget is therefore based on costs.
The sales department is a revenue center because the sales manager is primarily responsible for revenue, so this budget is based on revenue. The hotel manager is responsible for the profit center because he is responsible for both revenues and expenses, so this budget is based on revenues and expenses. OPD's management decided to make the sales department a profit center that would be responsible for revenue and expenses and changed the system of rewarding salespeople.
Learning Objective 5
For example, after observing a small decline in sales this period, managers may want to investigate whether this is indicative of an even steeper decline to follow later in the year. For example, purchasing managers may be held responsible for total purchasing costs not because of their ability to control market prices, but because of their ability to predict uncontrollable prices and to explain uncontrollable price changes. Similarly, managers at a Pizza Hut unit may be held responsible for operating income of their units even if they (a) do not fully control the selling prices or the cost of many food items and (b) have minimal flexibility over which items to sell. to sell or the ingredients in the items they sell.
However, they are in the best position to explain the differences between their actual business income and their budgeted business income. Responsibility center performance reports are sometimes intended to change managerial behavior in the direction that top management desires. As companies continue to differentiate in customer service while trying to control operating costs, driving efficiency in call centers wherever possible has become a critical issue, as has generating revenue through this unique channel.
Why have we covered two major topics, master budgeting and responsibility accounting, in the same chapter? As mentioned earlier in this chapter, budgeting is most effective when lower-level managers are actively involved and meaningfully involved in the budgeting process. Equally, line managers are unlikely to be completely honest in their budget communications if senior management mechanically imposes across-the-board cost reductions (say a 10% across-the-board cut) in the face of projected revenue reductions.
Learning Objective 6
Responsibility accounting helps managers focus first on who to ask to obtain information, rather than who to blame. For example, if actual revenues at a Marriott hotel are lower than budgeted revenues, the hotel's managers may be tempted to blame the sales manager for the poor performance. To explain one approach, let's consider the plant manager of a beverage bottler who is suspected by top management of underestimating the productivity potential of the bottling plants in his forecasts for the coming year. Management could also base part of the plant manager's compensation on his plant's productivity compared to other "benchmark" plants rather than on the forecasts he has provided.
Managers are often promoted from within and are therefore very familiar with the work of the employees who report to them. Some companies, such as IBM and Kodak, have designed innovative performance evaluation measures that reward managers based on the subsequent accuracy of the forecasts used in developing budgets. Many of the top performing companies, such as General Electric, Microsoft and Novartis, set “stretch” goals.
Much of the cost reduction associated with kaizen budgeting arises from many small improvements rather than "quantum leaps." Budgeting and Kaizen budgeting for specific activities are the main building blocks of the master budget. By the end of 2008, 29 state environmental agencies had conducted a kaizen session or were planning one.7 How successful these efforts would be depends greatly on human factors such as the dedication and commitment of the individuals involved.
Learning Objective 7
Kaizen budgeting explicitly integrates the continuous improvement expected during the budget period into the budget figures. Many companies with cost reduction as a strategic focus, including General Electric in the United States and Citizens Watch and Toyota in Japan, use Kaizen budgeting to continually reduce costs. Companies that implement Kaizen budgeting believe that employees who actually do the work, whether in production, sales or distribution, have the best information and knowledge about how to do the job better.
A kaizen budgeting approach would incorporate continuous improvement resulting from, for example, employee suggestions to do work faster or reduce idle time. Kaizen budgeting can also be applied to activities such as setups with the goal of reducing setup time and setup costs, or distribution with the goal of reducing the cost of moving each cubic foot of table. This means that in addition to budgeting in different currencies, management accountants in multinational companies also have to budget with exchange rates.
In addition to currency issues, multinational companies must understand the political, legal and especially economic environments of the various countries in which they operate. For example, in countries such as Zimbabwe, Iraq and Guinea, annual inflation rates are very high, leading to sharp declines in the value of the local currency. Required Prepare a budgeted income statement, including all necessary detailed supporting budget schedules that differ from the schedules presented in the chapter.
Solution
It expresses the management's operating and financing plans - the formalized overview of the company's financial goals and how they will be achieved. When poorly managed, budgeting can lead to gambling and budget slack – the practice of making budget goals more easily achievable. 6-19 Budgeting of material purchases. Mahoney Company has prepared a sales budget of 45,000 finished units for a three-month period.
The company has an inventory of 60,000 gallons of direct materials on December 31 and has a target ending inventory of 50,000 gallons at the end of the following quarter. At the beginning of the year Xerxes has a stock of 458,000 skeins of wool at a cost of. 6-24 Activity-based budgeting. The Chelsea store of Family Supermarket (FS), a chain of small neighborhood grocery stores, is preparing its activity-based budget for January 2011.
Gasoline costs for each van are budgeted based on the van's service area and expected mileage for the month. About 10% of sales are paid in cash and the remainder (the remaining 40%) is placed in a store account. 6-30 Revenue and production budgets. (CPA, adapted) The Scarborough Corporation produces and sells two products: Thingone and Thingtwo.
PL pays half of the purchases in the period of purchase, and the other half in the period thereafter. About 60% of purchases in a month are paid for that month, and the rest the following month.
